View full sizeRoss William Hamilton, The OregonianThe lobby of The Nines in downtown Portland. The competition hoped when it opened that it would be a win for all hotels in Portland. But it opened just as the economy tanked.

As local political leaders once again attempt to muster support for a large
convention-center hotel, a plan that tentatively includes a $12 million to $20
million public subsidy, some recession-scarred hoteliers say only "Remember the
Nines."

The Nines, a 331-room luxury hotel in downtown Portland, funded in part
with $16.9 million in loans from the city, has made few friends among its
competitors since it opened in 2008.When the economy tanked, The Nines
aggressively discounted, offering its opulent rooms for $99 a night. Competitors
had little choice but to offer steep discounts of their own, starting a downward
spiral that slashed their revenues by 20 to 40 percent.

Sage hasn't paid the city a dime since, even as the economy and hotel
business has strengthened.

"The Nines came in and really rubbed people the wrong way," said Portland
business consultant Gwenn Baldwin. "Opponents of the Convention Center hotel
hold up the Nines as a symbol of what can go wrong."

The furor over The Nines illustrates the tricky politics of economic
development. In the Tea Party era, when few government spending decisions go
unchallenged, one person's strategic investment in the future is another's
unconscionable government giveaway. The Nines sets off the same debate of
political favoritism and unintended consequences as Oregon's generous Business
Energy Tax Credits and the U.S. Energy Department's backing of failed solar
operation, Solyndra.

In fairness to The Nines and the city, the hotel is still open for business
and has added some much-needed vitality to downtown. Convincing Sage to tackle a
difficult project in an old building, and helping save the downtown Macy's store
in the process, marked a significant feat of salesmanship by the city, a fact
even some competitors concede.

"Yes, I probably would have preferred a condo project or an office building
on top of Macy's," said Chris Erickson, general manager of The Heathman Hotel.
"But to me, having a boarded up Macy's and an empty hole in the middle of
downtown would have been a disaster."

Others take a dimmer view. The Nines' discounting started a destructive
rate war from which the industry is still struggling to recover, a war The Nines
could better afford because of its public subsidy. You can hear the echo of The
Nines in their talking points about the proposed Convention Center Hotel. "The
worst thing we can have is a big hotel chain come in on the public dollar,
siphon off our business, and leave the public holding the bag," said Len
Bergstein, a Portland public relations consultant working on behalf of Aspen
Lodging Group.

DEEP DISCOUNT

Planning for The Nines dates back 10 years.

The city was desperate to preserve Meier & Frank's presence in its
landmark 1916 building. But the 15-story building was partially vacant and much
larger than the retailer needed.

The PDC worked for years to find a tenant for the building's upper half.
They found Sage, a Denver-based hotel developer. The deal survived many
challenges, including the 2005 purchase of Meier & Frank's parent company,
the May Department Store Co., by Federated Department Stores.

Sage convinced financial giants JP Morgan Chase and Prudential to provide
the bulk of the financing for the $130 million project. But it also aggressively
pursued public money. In addition to the loans from the city, Sage also secured
historic preservation tax credits and New Market tax credits to help fund the
deal.

At the gala grand opening, Sage officials vowed that The Nines would be
Portland's first four-star hotel boasting its own art collection, high-end
finishes and a hefty $249 nightly rate.

Local competitors tried to convince themselves their new well-heeled
competitor and its 330 rooms would be good for all.

"We were really excited about The Nines," said Bashar Wali, general manager
of the Aspen Lodging Group. "Finally, someone would come into this market and
help us break the $200-a-night ceiling. The thought was, if they're getting
$249, we'll get $180-$200."

But Sage's timing proved horrendous. It opened The Nines just as the
economic panic of 2008 was nearing its peak, a month after Washington Mutual and
Lehman Brothers failed and the world financial system seemed on the precipice of
collapse.

The Nines quietly began offering rooms for $99.

Others soon followed suit.

"It set off a race to the bottom," said Wali, who oversees operations at
the Hotel Deluxe and Hotel Lucia in Portland. Wali's hotels cut rates by 40
percent. "We further deepened the crash by our panic, by our behavior."

In March 2009, fives month after The Nines opened, Sage sought help from
the PDC. Business at The Nines had fallen well short of expectations. Sage said
it needed a temporary reprieve on its monthly loan payment to the city. Company
officials predicted at the time that they could resume payments in 2011.

The PDC agreed, saving Sage more than half-a-million dollars a year.

ROOM AT THE INN

All of Portland's central city hotels suffered over the last four years.
Occupancy fell nearly 10 percent. Revenue per available room, a key benchmark of
a hotel's health, fell more than 16 percent from 2008 to 2009, according to data
from Travel Portland, an industry-funded group that promotes local tourism.

Because hotels have high fixed costs, a 20 percent decline in revenue can
lead to a 100 decline in operating profits, said Mark Fraioli, a San
Francisco-based hotel analyst with Jones Lang LaSalle.

Two competing Portland hotels – the Governor and the Avalon – have recently been put on the market by the Royal Bank of Scotland. Property documents
indicate that the bank took control of the properties last summer.

Travel Portland CEO Jeff Miller said he heard plenty of complaints from
local hoteliers about The Nines' aggressive room discounts. He argues, however,
that the shiny new competitor became a scapegoat for the lousy economy.

"I'm not sure The Nines is the culprit," Miller said.

Since those bleak days, the industry has staged a rousing turnaround.
Downtown Portland hotels have shown decent occupancy and room rate gains in 2010
and 2011. "It's clear that a recovery is taking hold," industry analyst Fraioli
said.

Nevertheless, three years since Sage first approached the city for relief,
it continues to get a free pass. The 2009 agreement puts Sage on a "cash-flow
dependent" basis, meaning it has pay on its debt to the city only if it has the
money to do so after paying all its other expenses.

To date, The Nines has failed to generate sufficient cash to warrant
payment to the city, PDC spokesman Shawn Uhlman said.

The PDC refused to release The Nines' financial information arguing it is
exempt from disclosure under Oregon records law. Sage declined repeated requests
for comment.

Into the fray, steps Metro Council President Tom Hughes, who is championing
the latest drive for a convention center hotel. It's a significantly scaled down
plan from a 2008-2009 proposal, a $200 million-plus plan that was to be funded
in part by taxpayers.

Like other advocates before him, Hughes argues that the Oregon Convention
Center desperately needs a 600-room hotel in the immediate vicinity to attract
the biggest conventions. Thirty of these "national" conventions turned thumbs
down on Portland in the last year, Hughes said. "When we asked them why not,
they keep coming back to the lack of the hotel."

The tentative plan calls for phased construction and a "modest" public
subsidy in the $12 million range, most likely in the form of forgiven hotel room
taxes. The city and county, which both receive a cut of the transient lodging
tax, would have to sign off on the plan.

Hughes argues that larger conventions would be a net gain for everyone,
including existing hotels, which could grab a share of the new business.

Local Hilton executive Brad Hutton, a vocal critic of The Nines, is leery.

"I do think it would induce some demand," Hutton said of a convention
center hotel. "But it's the other half of the time that worries me, when there
isn't a convention in town. Then they'll be competing with us."